INTRODUCTORY ACCOUNTING PAF3023

THE BASIC FRAMEWORK Chapter 1

TODAYS INSPIRATION

THE MOST IMPORTANT THINGS IN LIFE IS FREE

WHAT IS ACCOUNTING
PEOPLE AND BUSINESS i. Accounting is something that effect people in their personal lives just as it affects business.

RECORDING ACCOUNTING DATA ii. They cannot keep all the details in their minds so they have to keep record of its. -organization record cash received and paid, record goods bought and sold.

CLASSIFYING AND SUMMARISING iii. Data being organized so as to be most useful to the business. -so as it will be possible to work out how much profit or loss has been made by the business. - possible to show what resources are owned, what resources are owned by the business.

COMMUNICATING INFORMATION iv. Be able to tell whether or not the business is performing well financially -able to ascertain the strengths and weaknesses of the business.

What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the economic events of an
(2) organization to (3) interested users.

LO 1 Explain what accounting is.

What is Accounting?
Three Activities
Illustration 1-1 Accounting process

The accounting process includes the bookkeeping function.

LO 1 Explain what accounting is.

WHAT IS BOOKKEEPING Bookkeeping is a part of accounting that is concerned with recording data.
Bookkeeping is the process of recording data relating to accounting transactions in the accounting books.

USER OF ACCOUNTING INFORMATION

Owner of the business A prospective buyer The bank Tax inspector A prospective partner Investors Suppliers Employees

Who Uses Accounting Data?

Internal Users Management IRS

Human Resources
Finance

Investors
Labor Unions Creditors Customers SEC External Users

Common Questions

Marketing

LO 2 Identify the users and uses of accounting.

Who Uses Accounting Data?

Common Questions Asked
1.Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. Will the company be able to pay its short-term debts?

User Human Resources Investors

Management
Finance

Marketing
Creditors

LO 2 Identify the users and uses of accounting.

The Building Blocks of Accounting

Ethics In Financial Reporting
Standards of conduct by which ones actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.
Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound ethical behavior.

LO 3 Understand why ethics is a fundamental business concept.

THE ACCOUNTING EQUATION

i. The whole of financial accounting based upon this simple idea which known as accounting equation.

ii. Resources supplied by owner = capital

Actual resources that are in the business = assets that is: CAPITAL = ASSETS

Liabilities iii. If people other than the owner have supplied asset we call it as liabilities. Means liabilities is the amount business owe for these assets.

The Basic Accounting Equation

Assets
= Liabilities + Owners Equity

Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims.

LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

The Basic Accounting Equation

Assets
= Liabilities + Owners Equity

Provides the underlying framework for recording and summarizing economic events.

Assets
Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

The Basic Accounting Equation

Assets
= Liabilities + Owners Equity

Provides the underlying framework for recording and summarizing economic events.

Liabilities
Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

The Basic Accounting Equation

Assets
= Liabilities + Owners Equity

Provides the underlying framework for recording and summarizing economic events.

Owners Equity
Ownership claim on total assets.

Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship or Partnership).
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

Owners Equity
Illustration 1-6

Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

Owners Equity
Illustration 1-6

Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

Using The Basic Accounting Equation

Transactions are a businesss economic events
recorded by accountants.
May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

LO 7 Analyze the effects of business transactions on the accounting equation.

Transactions (Problem)
P1-1A: Barones Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. 1. Invested $10,000 cash to start the repair shop.
Assets Cash Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000

+10,000

Investment

LO 7 Analyze the effects of business transactions on the accounting equation.

Transactions (Problem)
2. Purchased equipment for $5,000 cash.
Assets Liabilities Equity

Cash 1. +10,000
2. -5,000

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

+10,000
+5,000

Investment

LO 7 Analyze the effects of business transactions on the accounting equation.

3. Paid $400 cash for May office rent.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400

Investment

3.

-400

Expense

LO 7 Analyze the effects of business transactions on the accounting equation.

4. Received $5,100 from customers for repair service.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400 +5,100

Investment

3. 4.

-400 +5,100

Expense Revenue

LO 7 Analyze the effects of business transactions on the accounting equation.

5. Withdrew $1,000 cash for personal use.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400 +5,100

-1,000

Investment

3. 4.
5.

-400 +5,100
-1,000

Expense Revenue
Drawings

LO 7 Analyze the effects of business transactions on the accounting equation.

6. Paid part-time employee salaries of $2,000.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400 +5,100

-1,000 -2,000

Investment

3. 4.

-400 +5,100

Expense Revenue
Drawings Expense

5. -1,000 6. -2,000

LO 7 Analyze the effects of business transactions on the accounting equation.

7. Incurred $250 of advertising costs, on account.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400 +5,100

-1,000 -2,000 +250 -250

Investment

3. 4.

-400 +5,100

Expense Revenue
Drawings Expense

5. -1,000 6. -2,000 7.

Expense

LO 7 Analyze the effects of business transactions on the accounting equation.

8. Provided $750 of repair services on account.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400 +5,100

-1,000 -2,000 +250 +750 -250 +750

Investment

3. 4.

-400 +5,100

Expense Revenue
Drawings Expense

5. -1,000 6. -2,000 7. 8.

Expense Revenue

LO 7 Analyze the effects of business transactions on the accounting equation.

9. Collected $120 cash for services previously billed.

Assets Liabilities Equity

Transactions (Problem)
Cash

Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital

1. +10,000
2. -5,000 +5,000

+10,000 -400 +5,100

-1,000 -2,000 +250 +750 -250 +750 12,200

Investment

3. 4.

-400 +5,100

Expense Revenue
Drawings Expense

5. -1,000 6. -2,000 7. 8. 9. +120 6,820 +

Expense Revenue

-120 630 +

5,000 =

250 +

LO 7 Analyze the effects of business transactions on the accounting equation.

EQUALITY OF THE ACCOUNTING EQUATION

Every transaction has effected two items. Sometimes it changed the assets side and the capital side. Sometimes it has changed two assets by reducing one and and increasing the other.

EQUALITY OF THE ACCOUNTING EQUATION

Number of transaction as above

Assets

Capital and liabilities

Effects on balance sheet totals

1 2 3 4 5 6 7

+ + + + + + -

Each side added equally. A plus and a minus both on the assets side cancelling out each other. Each side has equal additions. A plus and a minus both on the assets side cancelling out each other. A plus and a minus both on the assets side cancelling out each other. Each side has equal deductions. A plus and a minus both on the assets side cancelling out each other.

Example of transaction
1. Owner pays capital into the bank 2. Buy goods by cheque. 3.Buy goods on credit 4. Sale of goods on credits 5.Sale of goods for cash (cheque) 6. Pay creditor 7.Debtors pays money oeing by cheque.

Effect
Increase asset (bank) Decrease asset (bank) Increase asset (stock of goods) Decrease asset (stock of goods) Decrease asset (stock of goods) Decrease asset (bank) Increase asset (bank)

Effect
Increase capital

Increase asset (stock of goods) Increase liability (creditor) Increase asset (debtors) Increase asset (bank) Decrease liability (creditor) Decrease asset (debtors)

Financial Statements
Companies prepare four financial statements from the summarized accounting data:

Income Statement

Owners Equity Statement

Balance Sheet

Statement of Cash Flows

LO 8 Understand the four financial statements and how they are prepared.

THE BALANCE SHEET AND THE EFFECTS OF BUSINESS TRANSACTIONS

Balance sheet shows the financial position of an organisation at a point in time.

The introduction of capital

On 1 May 20x7, B Blake started in business and deposited RM5,000 into a bank account opened specially for the business

The introduction of capital

B Blake Balance Sheet as at 1 May 20x7 Assets RM Cash at bank 5,000 Capital 5,000

The purchase of an asset by cheque

On 3 May 20x7, B Blake buys a building for RM3,000 paying by cheque. The effect by this transaction on the balance sheet is that the cash at the bank is decreased and the new asset, building is added;

The purchase of an asset by cheque

B Blake Balance Sheet as at 3 May 20x7 Assets RM Building 3,000 Cash at bank 2,000 5,000 Capital 5,000

The purchase of an asset and the incurring of a liability

On 6 May 20x7, Blake buys some goods for RM500 from Smith and agrees to pay for them some time within the next two weeks. The effect of this is that a new asset, stock of goods, is acquired, and a liability for the good is created. A person to whom money is owed for goods is known as creditor.

The purchase of an asset and the incurring of a liability

B Blake Balance Sheet as at 6 May 20x7 Assets RM Building 3,000 Stock of goods 500 Cash at bank 2,000 Capital 5,500 Less: creditor ( 500) 5,000 Capital 5,000

End Chapter 1